Searchlight Crusade http://www.searchlightcrusade.net/ "What you need to know about mortgages and real estate. And more." en Copyright 2009 Mon, 13 Jul 2009 07:00:00 -0800 http://www.sixapart.com/movabletype/ http://www.rssboard.org/rss-specification This is an XML content feed. It is intended to be viewed in a newsreader or syndicated to another site, subject to copyright and fair use. Some Offers Are More Equal Than Others Animal Farm is intentional. Sellers need to understand this, and so do buyers, especially in a hot real estate market like San Diego has currently become. Some offers are more equal than others, and knowing how to choose between competing offers on the selling side is critical. On the buyer's side, understanding this and anticipating it so as to make your offer attractive to a seller with a good agent is critical to success in making offers. Even if they are for the same number of dollars or even for larger amounts, some offers are much less likely to actually consummate than others. If they don't consummate, all that happens for sellers is that they wasted their time, their money, and came up with nothing. Furthermore, once you have a fully negotiated purchase contract, the chances of renegotiating it so the seller gets more money are nil. Most purchase contracts, the seller needs to make concessions due to things discovered to be suboptimal with the property. Sad to say, there are even some very shark-like real estate types that go around making offers with the intention of using every little thing to renegotiate the contract in their favor. They make their offer look superficially attractive and then once they have a purchase contract start demanding concessions right and left. There are currently three major things likely to prevent a transaction from actually going through. The first is the Home Valuation Code of Conduct sticking the transaction with an appraisal that's lower than the purchase price. Last month I had an appraiser choose two completely trashed lender owned beaters down the hill as comps for my client's beautifully maintained property in a more desirable location, and there wasn't a thing I could do about it even though there were better comps. When this happens, all the issues in When The Appraisal Is Below The Purchase Price for Real Estate come into play. If the loan standards are eighty percent Loan to Value Ratio and the buyer only has 20% to put down, when the appraisal comes in low, the cash isn't there to make it happen and the transaction will fail. In some cases, private mortgage insurance can maybe extend it to ninety percent currently, possibly 95% in a few cases, but 100% financing is out of the question for anyone but veterans, and adding private mortgage insurance often means the buyers don't qualify on the issue of debt to income ratio. Most often, if the appraisal comes in low it means that either the transaction is going to fall apart, or there is going to be a mixture of the buyer adding more cash to the deal and the seller lowering the price. If the buyer doesn't have more cash to add to the deal, it doesn't take much predictive ability to see that things are going to boil down to the seller deciding whether they'd rather find another buyer or take less money. The second thing likely to prevent a transaction going through is issues with the property. Something is discovered during the buyer's due diligence period that causes them not to want the property, or to want . It could be anything. These issues are always with us. The only way not to be surprised by them is for the seller to be honest with themselves and do their own due diligence beforehand. The third major deal-killer is buyer inability to qualify for the loan. Either they represented themselves as having more cash than they do, they really don't qualify for this loan on this property, or some miscellaneous loanbuster issue pops up. This is why I insist that every qualification letter I write and every letter I'll counsel my clients to accept be a pre-qualification written for that specific property and that specific offer. A generic "They qualify for $300,000" letter is wasted paper. The person writing that letter must also make specific representations as to why the buyer qualifies on the basis of debt to income ratio, loan to value ratio, credit score, and Cash to Close. For my listing clients, it the offer doesn't do this, I send the buyer back to try again. I tell them what the letter must cover, and I will counsel my clients never to accept an offer that doesn't include this information. Running an automated underwriting program is easy and popular, but never acceptable for this purpose. Automated underwriting results are only valid if they don't change anything from how it was submitted. Let me tell you something that happened to me not long ago: I got an automated underwriting accept and priced and locked the loan and sent the file through on that basis. My processor, for reasons beknownst only to them, took it into their head to run automated underwriting through again on precisely the same file and got a lesser acceptance that raised the cost of the loan and cost me most of the money I would have made on that loan, and it could easily have changed to an outright rejection of the loan. This was for a refinance where nothing of consequence changed except for a precise appraisal amount that was still well within guidelines. What do you think is likely to happen when the purchase price changes or the the precise loan amount or any of dozens of other factors changes by a little bit? I never accept automated underwriting results for a purchase offer. Manual underwriting rules, however, are universally good, particularly in the A paper world. If something happens at one lender that causes it to have trouble, somebody else will take it if the manual underwriting standards are met. I should also stress that sellers live in a world where net proceeds are what is important. If the transaction doesn't close at all, the net proceeds to the seller are negative regardless of what was offered. Even if the transaction closes, an offer for $200,000 requiring them to pay $5000 for seller paid closing costs is in actuality $5000 and some change less net money to them than an offer with no such requirements. A good buyer's agent is going to make careful consideration of this. So keeping these in mind, which offer is the most attractive to a seller, assuming the same number of dollars and desirability of the offer? All cash offers are always going to top this list. If the buyers don't care what lenders think, if they don't need a loan or a loan contingency, don't have to be concerned with loan standards, that eliminates an entire layer of complexity that includes most of the likely reasons why things fall apart. An all cash offer without an appraisal contingency is the Gold Standard. They are saying "The property is worth $X to me - I don't care what an appraiser thinks" They can still be intending to over-negotiate every little thing revealed by the inspection, but there is less to go wrong from a "nothing you can do in the initial contract" standpoint. The next category on the list is offers where there buyer has significantly more cash than lender standards require for the contemplated loan type, particularly if they're planning to use it for the down payment anyway. This means that the buyer has the option of continuing the transaction even if the appraisal comes in low. Since all the incentives right now are for appraisers to come in low on the appraisal, this is happening a lot right now and there is nothing anyone can do about it except repeal those ridiculous new appraisal standards. If the buyer has more cash, when the appraisal comes in lower than the purchase price the viability of the transaction doesn't depend upon the seller deciding whether to take less money or put the property back on the market. If the buyer has more cash than absolutely necessary, the parties can meet in the middle rather than the seller being the only one with room to give. Conventional financing purchase offers of thirty percent cash or more and VA loans where the buyer is putting down cash even though they don't have to fall into this category, and even FHA loans where there is a cash cushion. I always want to address the question of "How low would the appraisal have to come in before this transaction has difficulty because of it?" Offers where the buyer has this cash cushion means that if the appraisal comes in slightly low, it isn't just the seller deciding whether to take less or put it back on the market. I would rather have conventional financing than government. Government involvement puts a bottleneck, or single point of failure on the transaction - if the government won't put their seal of approval on it, we're done. It also takes longer. That said, I need to say that both VA and FHA are unfairly tarred in many agent minds because until a few years ago they were costly bureaucratic nightmares for the seller. The bureaucratic issue has largely changed, but it is still an issue even if it is a much smaller one, and a VA loan in particular does not permit a buyer to pay a lot of very real and necessary costs, so the VA loan needs to be for a higher number of dollars to break even on this point with conventional ones. If a buyer wants a government loan but can go conventional, that will delay the transaction if they start out government but need to change to conventional, but it should still close. There is a fallback position. This is a critical difference and makes such an offer superior to one where they have no choice but a government loan, particularly some special or limited funding government program like the mortgage credit certificate or locally administered first time buyer programs Both when writing an offer and evaluating one, I always want to address the question of what circumstances or combination of circumstances could cause this to fall apart. As a buyer's agent, I want to show the listing agent that my client wants the property and I have considered how to get around potential failure points. As a listing agent, I have a fiduciary responsibility to help my clients evaluate offers and make an informed choice on which offer to accept based in part upon likely failure points. Comparatively few agents meet that responsibility (one reason we've got such extreme transaction fall out now) but the good ones are all among them. A good listing agent is always looking for evidence in an offer that the buyer's agents have considered possible failure points and how to get past them. Waiving the appraisal contingency is always an argument in favor of an offer. It can be symbolic, but it says "The property is worth $X to me, and I'm willing to pay that whether or not the appraiser agrees". Nonetheless, if there is a loan contingency attached to such an offer it's not an unlimited blank check. If the appraisal comes in lower than the difference the buyer can cover, the transaction is still going to fall apart. If the buyer has no extra cash, waiving the appraisal contingency accomplishes nothing. But a prospective buyer having $10,000 extra cash and no appraisal contingency should be something that is very valuable to well informed listing agents and their clients. What if your offer is less desirable in these terms, quite likely because you have no choice? Well then you need to offer more money to sweeten the deal and give the sellers a reason to choose your offer over any others. When I'm acting as a buyer's agent, I always discuss how much competition we're likely to see from other offers if my buyers like a property. It's not a perfect science, and I never trust a listing agent telling me how many other offers they have (Unless the answer is "none") or for what dollar amount, but it's like gravity: if you don't take it into account, you're certainly not going to get where you want to go. Caveat Emptor ]]> http://www.searchlightcrusade.net/2009/07/some_offers_are_more_equal_tha.html http://www.searchlightcrusade.net/2009/07/some_offers_are_more_equal_tha.html Buying and Selling buyer's agent buyers competition listing agent loan qualification negotiation sellers value Mon, 13 Jul 2009 07:00:00 -0800 Working with Multiple Agents for a Purchase If you have three real estate companies sending you emails with multi-listings, if you want to see one of the properties, who gets the commission? There five properties that I want to see the inside of the houses. Company A, B, C, etc. One house is listed by one of the three people that have been sending me emails.Am I obligated to sign up with an agent if I want to see the inside of a house? Do I tell the other agents not to send me anymore multiple listings? That depends upon you and upon the agent and upon what sort of agreement, if any, who have signed. If you haven't signed any representation agreements, nobody has grounds to complain. I don't ask for any agreement just to have listings automatically e-mailed to a prospect (within limits), or even an automated site for them to manage those listings. I have to have MLS access anyway, and that comes as part of the package. I look at it as an opportunity: for a few minutes work, I'm likely to end up with a prospective buyer. If one in a hundred of these converts to a transaction, I'm ahead of the game. The ratio is much higher than that. I could use it as an opportunity to set up my toll booth, and many agents do, but although they may be "top producers" because they cut out other agents for having their receptionist take five minutes out of their day to set this up, they're not the sort of agent someone who compares agents in action will likely choose. If you've signed a non-exclusive representation agreement, the one who is the primary motivating factor behind the sale should be the one paid. This may be the agent who introduces you to the property, or it can be the agent who answers all of your questions well enough that you're willing to make an offer. It can also be the one who fast talks or pressures you into making the offer, but that's the beauty of non-exlcusive agreements. You can fire such agents by just not working with them any more, and they're out of your life and out of the transaction. If you've signed an exclusive representation agreement, then the person you signed the exclusive agreement with is legally entitled to be paid. This is a problem if someone else really sold the property to you, or if you've signed two or more such agreements. Furthermore, you can't fire bad agents with an exclusive agreement except by waiting for it to expire. You sign a six month exclusive agreement in April, they're going to get paid for any transaction you start through October (and possibly longer) - even if you told them you never want to see their face again before April was over. Many agents will ask you to sign an exclusive representation agreement before they do anything. You shouldn't sign one at all. Non-exclusive is plenty good to protect the agent while preserving your protections against a bad one. And there is no reason not to sign the standard non-exclusive agreement. I have heard every rationalization under the sun as to why exclusive agreements are desirable. The only person they're desirable to is insecure or incompetent agents. There is no advantage for the consumer to sign one. Exclusivity prohibits real competition, where the consumer can observe your skills and your attitude in action. Anybody can look good in the office before you've seen a single property together. That's just sales patter. The proof is watching them in action when you're evaluating property together. That's where you can tell the best agents from the friendly idiots, the high pressure commission grabber, and all the other problem personalities around. And sometimes, that's where you find out that they're not so friendly after all. Unless it's showing one of my listings, I won't go out with someone who's signed an exclusive with someone else, and neither will any other agent I know of. I'm not going to show someone the bargain I spent twenty or thirty hours finding so that an agent who couldn't be bothered to get out of their swivel chair can get paid for the work I did, but you'd be disgusted at how often I get the request. If all you're getting is a sit on their hands agent who never leaves their office to scout property for you, whether they're an explicit discounter or someone pretending to be full service, then the purchase contract itself has confirmation of the relationship and there is no need to sign an agreement in advance of this at all. The same is true anytime you approach an agent with a property you have already determined to make an offer on. The agency relationship is confirmed in the purchase contract, indeed, in the initial offer. There's absolutely no need to sign any kind of representation agreement with them outside of that. It's simply one more method by which rotten agents lock up business, because if you sign that exclusive agreement they ask for, they've got you for however long it lasts. I've been told - by clients - about listing agents who wouldn't communicate an offer until they had signed a buyer's representation agreement - a clear violation of fiduciary responsibility to that owner. I've heard every rationalization under the sun here, as well. "I'm putting my time into this! I deserve to get paid if it falls apart!" is the most common one. My response is to such agents is, "Then make sure it doesn't fall apart, and no, you don't." The reason agents get paid as much as they do is because their pay is contingent upon a successful, fully consummated transaction. It's right there in all of the standard WinForms contracts. If an agent can't make this transaction go, they haven't earned any kind of right to mess up another one also. If you, the client, want to stick around once you've seen them in action, that's great! If not, that should also be within your range of choices. An exclusive agreement removes that option. Caveat Emptor Original article here]]> http://www.searchlightcrusade.net/2009/07/working_with_multiple_agents_f.html http://www.searchlightcrusade.net/2009/07/working_with_multiple_agents_f.html Buying and Selling buyer's agent buyers negotiation planning practices strategy Sun, 12 Jul 2009 11:00:00 -0800 Payment, Interest Rate and Up Front Costs: Choosing a loan intelligently LEAST important of these four factors. As long as it's something you can afford, do not charge straight ahead, distracted by the Big Red Cape of "Low Payment" while you are being bled to death by other things. Many of these Matadors (which means killers in Spanish) will bleed you to death while acting like your friend by distracting you with the "affordable low payment", not unlike the matador distracts the bull with the cape so they never see the sword. Due to lack of a real financial education in the licensing process, a disturbingly large number do not realize they are bleeding people, but that doesn't help their victims. A loan payment that is higher but still affordable may be a better loan for you - and in fact this is more likely true than not. The three other factors are each far more important than payment. Payment is important. People who are unable to make their payments are called insolvent. Many of them file bankruptcy, have liens placed upon them, wage garnishments, suffer for years because of bad credit ratings, etcetera. But just because the cash flow is better right now does not mean the situation is better - that way lies the Ponzi scheme, Enron, and many other famous wrecks in the financial graveyard. I've been telling people this for years - and now with the loan meltdown it's become undeniable. Negative amortization and other unsustainable loans will come back around to bite those who use them. There is no universal ranking of which of the remaining three factors is the most important. They must be compared as a group in the light of a given situation: YOUR situation. The monthly interest charges are simple. Principle balance times interest rate. This starts at the amount of the new loan contract (with all the costs added in, of course) times the interest rate. The costs sunk into the loan shouldn't be any more difficult to compute, but they are. As I have gone over elsewhere, it is an unfortunate fact that rarely does a mortgage provider tell the entire truth about the costs of the loan until it's too late to do anything about it. If you have an ethical loan provider, the amount on the Good Faith Estimate (or Mortgage Loan Disclosure Statement here in California) should match what shows on your HUD 1 at the end of the process. Please remember to note any prepayment penalty or other back end charges as a separate dollar amount. The thing that is most difficult to determine is how long you intend to keep the loan. Most people have no reliable crystal ball to gaze into the future. The obvious answer to this dilemma is to compute a break even point. This completely falls short with regards to higher costs incurred after disposing of the loan as a result of having a higher balance, but it's a start. If one loan has lower costs and a lower interest rate, there's no need to go through the computations. But if as is common, one loan has a higher sunk cost and the other has a higher monthly interest charge, divide the difference in sunk costs by the difference in interest charges per month. This gives a figure in months that is a break even point. Don't forget to add in any possibility of a prepayment penalty. With this breakeven figure in months, you can calculate which is likely to be the better loan for you, using your own situation as a guide. If the breakeven is 54 months and you're being transferred in 36, the answer is obvious. If you've refinanced at intervals of twenty-four months your whole life, a 54 month breakeven is not likely to be beneficial. If you're going to need to sell in two and a half years when mom retires, that's a clue, too. And if you're a first time home buyer starting out, remember that 50% of all homes are sold or refinanced within two years, so unless you have some reason to suspect that you are likely to be different, take that into account. Far too many people waste thousands of dollars regularly by paying the up-front costs for loans that they will not keep long enough to break even. Caveat Emptor Original article here]]> http://www.searchlightcrusade.net/2009/07/payment_interest_rate_and_up_f_1.html http://www.searchlightcrusade.net/2009/07/payment_interest_rate_and_up_f_1.html Mortgages closing costs loans payment rate/cost Sat, 11 Jul 2009 07:00:00 -0800 Why There Is Money in Fixer Properties why the owners think they can get more money for it! So they go out, and after my careful work of making sure to stay within their budget, on a sustainable loan they can afford, this other agent shows them what, by comparison, is the property of their dreams and says they can buy it!, and he knows where they can get the loan! If this sounds familiar, it happens a lot. "Dan was showing us such ratty properties by comparison! This guy is showing us beautiful stuff we love! Let's buy one!" and the first I find out about it is they tell me they're in escrow on someone else's property. Most people buy based upon emotion. If you want to make one change in the value of your financial future, learn how to take emotion out of your decision-making process, especially on anything big enough to require payments. Once people have emotionally convinced themselves that they deserve this property, my rational analysis of the situation doesn't have a snowball's chance in July of talking them out of it. I know this very well. I could stamp out buyer's transactions at the rate of three or four per week by showing clients two or three ratty fixers within their budget and then moving in for the kill by showing one immaculate property in ready to move in condition for thirty percent more. But this is hosing people with malice aforethought, and no matter how many others do it, I'd have problems shaving without looking in the mirror, and I need to shave every day that I work. The reason that wasn't within their budget is that they cannot afford the payments, or they cannot afford the real payments. I've said this before, but there are no tricks to make the real cost of the loan cheaper. There are ways to lower the payments for a while, but they always come back to bite you in a few years, and the situation will be worse than if you had taken the sustainable loan in the first place. Buying a more expensive property than you can afford is a way to put yourself on a course for disaster. Kind of like Comet Shoemaker-Levy 9 And that's why there is money in fixers. It's all very well for people to say they are interested in the $400,000 fixer that fits within their budget and that they can fix it up and sell. Particularly first time homeowners, particularly young married couples, and especially if they have children, show them the $600,000 move-in ready property and they will bite almost every time, budget buster or not. Put all three factors together and not all of the wisest people in history together could talk them out of it. So the smart operator offers $350,000 for the fixer that's been on the market for four months, spends $40,000 on upgrades like carpet and modernizing the kitchen or adding one more bedroom and bathroom, and turns around and sells for $620,000, of which she keeps approximately $186,000 in profit. If the buyer needs them to pay some closing cost in order to make the transaction happen, she still makes $175,000 for a few months work. Not bad, eh? Now the average couple don't have $40,000 to upgrade the property immediately. I consider myself very lucky to have worked with two such couples in the last year. Most potential buyers try to minimize the down payment as much as possible. But if they buy that livable fixer, they have a lot more room on their monthly budget and as much time as they want. At 6% interest rate and California standard property tax rates, the $620,000 loan has a payment of $3717, plus $646 in property taxes. The fixer property, even if they buy for $400,000, the payment is $2398 and the taxes are $417. I know that it's smarter to split the loan into two, but work with me for the sake of simplification. So the already fixed property costs $4363 per month, while the fix it themselves costs $2815. That's over $1500 per month difference they have to put towards fixing it up, or anything else they want to. In two years, they've got the $40,000 from that $1500 per month payment difference alone. This is leaving aside the issue that the rate on the bigger loan isn't going to be as low. The new owners can concentrate on the most important updates. Sure, it's a pain. That's why buyers are willing to pay $620,000 for the ready to move in property. Actually, they'll line up to pay $620,000 for the more attractive property. It's just the way things are. And they get done with their two year project, and now it's worth every bit as much as the property that was worth $620,000 to start with. At 5% annual for two years, that's $683,000, and it's getting to the point where I expect our local market to turn harder than that. If they sell, that's approximately $235,000 in their pockets (tax exempt in most cases) instead of in the professional fixer's. If they bought the move-in ready property and then sold, they'd net about $15,000 by the same calculations. Now most properties, even fixers, won't generate quite this kind of quick windfall. But that is a real example I encountered not long before I originally wrote this. Moral of the story: fix it yourself if you can. By isolating off the emotional appeal, you've made yourself - or saved yourself - a lot of money. And the reason there is money in fixers is because most people won't do this, instead convincing themselves that they're good people and they deserve this beautiful property. And you know, most folks are pretty good people, and they do deserve a beautiful property. But if you deserve the property that's beautiful now, you also deserve the huge cost, and the huge payments to maintain it, and you definitely don't deserve all the profit that the folks who buy the first kind of property make from the sale. Caveat Emptor Original here]]> http://www.searchlightcrusade.net/2009/07/why_there_is_money_in_fixer_pr_1.html http://www.searchlightcrusade.net/2009/07/why_there_is_money_in_fixer_pr_1.html Buying and Selling buyers property investment Fri, 10 Jul 2009 07:00:00 -0800 The Lender's Rule of Mortgage Payments It is YOUR responsibility to make all payments on time. Nobody else. Your name is on that contract, not theirs. Under text that says essentially, "I agree to repay this loan on these terms." When you are in the process of refinancing or selling, make it a point to keep paying that mortgage on time and in full. The worst thing that will happen is that you will get a check back a couple weeks later. Whereas if you blow the payment off, you are taking the risk, as happened to this person, that some incompetent person doing your new loan will not get the loan done in time to make the payment date. On the sixteenth, there's a penalty due. On the thirty-first day, it hits your credit, where it can conceivably make a difference of 150 points. And if the lender is getting ready to fund the loan the next day and runs your credit then and sees your drop, the terms of your loan just got worse, if they can fund the loan at all. It is the mark of a bad loan officer to tell you not to make your payments. A good one will specifically tell you to continue to make payments on time. I haven't blown a rate lock in a very long time, but there's always the possibility it might happen and the loan takes longer than I think it will. Don't let it happen to you. Make your payments on time, whatever you're doing. Corollary to Rule Number One: You are responsible for getting it to them. All of this nice convenient stuff about mailing a check or sending the payment online is quite a convenience, but they do not legally have to do it. Your grandparents had to walk the check (or the cash) in every month. You can still do this if your lender has branches and you suddenly remember on the 15th that you forgot to make your mortgage payment. Many lenders are very forgiving about this. But they don't have to be, If that payment doesn't get made on time, it is your fault. End of discussion. If you mailed it off on time and it got lost in the mail, you are the one that owes the penalty. If you transferred the money online, and it somehow doesn't get credited to the right account, it is your fault. These don't happen often, but they do happen. No matter the reason, you are responsible for getting that payment to that lender on time. If you don't understand this, or cannot live by it, don't get a mortgage. The lenders are actually very forgiving about it, provided you can convince them that the payment was made. The one time I had a check lost in the mail, they called me on the 17th, and I walked the check into the branch next day, and they waived the late fee. but all of that was because I had a solid record of paying well in advance of the deadline. If you're good enough about paying on time, sending the check on the first even though it's not officially late until the 16th, they're pretty forgiving about checks that get lost. On the other hand, if you are always paying on the last possible day, the lender is going to regard that late fee as the least they are due. While you are at it, always include something with your account number on it when you send the money. Write it on the check, include a coupon, put it in comments. Otherwise the lender could easily end up misapplying the funds of the check, especially if they figure to use the address on the check, and you're making a payment on another property. Most of the time they do get it right. But if they don't, it's your fault. If they get the payment with all of the necessary information and misapply it, that's their fault. If they didn't get it, on time or at all, or missing some important information, it's your fault. There is no rule two, at least that I can think of right now. There is only one rule, but you violate it at your extreme disadvantage. Caveat Emptor Original here]]> http://www.searchlightcrusade.net/2009/07/the_lenders_rule_of_mortgage_p_2.html http://www.searchlightcrusade.net/2009/07/the_lenders_rule_of_mortgage_p_2.html Mortgages cash credit law payment prevention Thu, 09 Jul 2009 07:00:00 -0800 Is Your Agent A Cheerleader Or An Analyst? tradeoff between rate and cost. Sometimes, they're not so obvious or direct, as when comparing between properties for sale. You can understand those trade-offs, and choose the one most advantageous to you, or you can choose in ignorance, metaphorically stamping "sucker!" on your forehead. A stronger agent or loan officer will explain those choices, and put the consequences of each in context. "This one is $50,000 more, but has another bedroom, another bathroom, and is 300 square feet larger. This one is $40,000 less, but it's going to cost you $80,000 to fix the foundation. This one is $30,000 less, but it's going to cost you about $10,000 for carpet and paint." On the loan side, "You can have a thirty year fixed rate loan at 6.5% for a total cost of $1500, as yield spread will pay the rest, or you can have 6% for a total cost of $8000, or you can have a 5/1 ARM at 6% for $3000, or a true zero cost 5/1 ARM at 6.375%" . An informed choice requires knowledge of both reasons for and against a given option. I don't try and tell them which property to make an offer on or which loan to like more. I can present one in a better light than another, but making the choice is not my job. My job is explaining the consequences of the choices the clients make before they're stuck with them, because in real estate, like in real life, there are no "do overs". People like to be told that everything is going to be easy. But that's not the way to get a good bargain in real estate. You shop for the best loan, force loan officers to compete, compare properties, force your agents to come up with bad things to say about every property, fire any listing agent who won't tell you hard truths from the first time they open their mouth. Real success in real estate is never easy. Real estate transaction can be made easy - at the price of giving the other side what may be the best deal since the Dutch bought Manhattan. Real estate, particularly in high cost areas where the largest proportion of the population live, is valuable enough that just a few percent of the purchase price can be more than most people make in a year, and if you're not on your guard, you may never know you've been had. I talked with a guy recently who had no clue that there was an identical property four doors down being offered for $140,000 less than he paid, at the time he paid it (I didn't tell him. Not my client, and done is done. No use stirring up trouble or getting him aggravated over something that could no longer be remedied). Really pay attention to the things people will do to save much smaller amounts of money for a few weeks, and it will remove all doubt in your mind as to whether scams happen. To use another gratuitous example, the vast majority of all the negative amortization loans out there. What percentage of people do you think are going to sign off on, "pay interest two percent higher than you could get, compounding against you in the lender's favor, end up owing more than the property is worth and being unable to refinance, and won't be able to afford the payments in three to five years, thereby ruining your credit for life and losing the property as well," if everything is laid out with full disclosure? But millions of people did, and I'm still getting email most weeks from people who were lied to by their loan officers and agents and only figured it out at signing! Bobby McFerrin wrote a great song, but "Don't worry, be happy!" is not the key to a successful real estate transaction. In fact, it's the direct opposite. If you're not willing to be a diligent guardian on your own behalf, I'm willing to bet money that nobody else involved will, either. Around here, even an average "small" transaction puts $300,000 or so onto the table. Ask yourself, "What would I do with $300,000 at stake?" Then ask yourself what the worst scoundrel you know would do with $300,000 at stake. I assure you that the world of real estate has people out there worse than any fictional villain - I've dealt with some of them. The fictional villain has to be believable; the real person only has to exist. Finally, ask yourself what somebody who's almost - but not quite - a saint might be willing to do with $300,000 on the table. The variations should give you a good idea as to the gamut of possibilities, but people are ingenious when it comes to ways to squeeze extra money out of someone else. Now ask yourself: Do you really want to hire a cheerleader as the expert on your side in light of this? Or do you want a cold-hearted analyst who really understands everything that can go wrong, and is going to tell you the downsides as well as the upsides of everything? It may not be as complex as the game of celestial billiards NASA plays with probes like Voyager, Galileo, and Cassini-Huygens, but a constant between the two is that, like celestial mechanics, real estate transactions have critical moments where if you are just a little bit wrong in what you do, you end up heading in completely the wrong direction, if not splatted into the side of the waypoint at several miles per second. Nor can you usually fix it later if you get it wrong at the critical moment. If you doubt this, spend a little time on any of dozens of real estate forums, reading the stories of the people who got it wrong, and are now trying to fix it. Buying real estate, or financing it, is a huge decision. So big that the emotional hind brain with all the "flight or flight" stuff over-rides our rational decision-making process, which was layered on in our complex operating system we call a brain much later, and loses out any time there is a conflict between the two. Fear and suspicion are hardwired into the hind brain. If anything about the situation is uncomfortable, the primary reaction of the hind brain is to get out of that situation. In fact, in many cases, the only way some sales folk can move a lot of people off their hunkered down position in mental concrete is by pretending that there is no possible downside to the transaction. Not only is this cheerleading behavior a calculated lie (unless the sales person really is that clueless themselves), but it destroys any element there may be of the healthy response of evaluating the situation completely, from a rational viewpoint. There is no such thing as a real estate transaction without potential downsides, and the ones you don't know about or don't understand are generally much worse than the ones you do. I don't know how many times I've heard people say things that reduced to "I can't be rational! This is far too important for that!" A good professional's most important job function boils down to keeping intellect in the process. I can't make Mrs. Lee (and women make the decisions when picking out the cave!) decide she emotionally likes the property enough to buy it (Even if I could, I wouldn't - that way lies professional disaster). That's Mrs. Lee's part of the process, and Mr. Lee will help. I can give them enough concrete reasons why or why not to get past that reptilian hind brain's emotional over-ride of the thought process. I've got to admit that the thought of being able to buy real estate and get loans stress free appeals to me, too. Being a carefree adolescent or child is appealing on a certain emotional level. But it's also profoundly dangerous. One of the wisest and most profound things I've ever read, despite the mixed metaphors, was the following:
"'Let George do it ' is not just the lazy man's motto. It is also the credo of the slave. If you want to be taken care of and not have to worry, that's fine; you can join the rest of the cattle. Cattle are comfortable - that's how you recognize them. Just don't complain when they ship you off to the packing plant. They've bought and paid for the privilege, and YOU SOLD IT TO THEM"
So how about it? Do you want to be comfortable, or do you want to be involved and understand everything going on? Do you want to have it all easy, or would you prefer to plan it through? Do you want to work with a cheerleader, or with an analyst? Maybe you've been reading the news these past couple years. Millions of people are in the process of losing their homes, having their credit ruined for years, and having the rest of their lives ruined, financially. Millions more have already been through it. I've yet to hear of one who was the client of an analyst-type agent or loan officer who disclosed everything the client needed to know at the appropriate time. There's always going to be a leap of faith somewhere in a transaction. Short of learning the jobs of three or four professionals on the same level of knowledge and practice as they possess, there is no way around this. But by going in with your eyes open, doing your own due diligence, and cross checking what you are told, you can make that leap into a short step, and give yourself confidence that your trust is not misplaced by verifying it isn't misplaced where you can check. Because most of the crooks out there are fundamentally lazy, and can not or will not do the work and preparation that will enable their little drama to withstand even small amounts of real scrutiny. Most of those desperate people I read or get email from, trying to recover from being royally taken advantage of, could have been saved by very small amounts of skepticism and research. Caveat Emptor Original article here]]> http://www.searchlightcrusade.net/2009/07/is_your_agent_a_cheerleader_or.html http://www.searchlightcrusade.net/2009/07/is_your_agent_a_cheerleader_or.html Buying and Selling buyers loans sellers Wed, 08 Jul 2009 07:00:00 -0800 Links and Minifeatures 2009 07 07 Tuesday IMPORTANT NEWS Fannie Mae and Freddie Mac are so pleased with their 105% refinancing program that they have announced they will be expanding the eligibility to 125% in about a month. This will help a lot of people who were left out in the cold by the 105% program
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Carnival of Real Estate Carnival of Personal Finance ]]> http://www.searchlightcrusade.net/2009/07/links_and_minifeatures_2009_07.html http://www.searchlightcrusade.net/2009/07/links_and_minifeatures_2009_07.html Zee Links and Minifeatures Tue, 07 Jul 2009 19:00:00 -0800 The Loan Shopping Koan promised will actually be delivered. This has only become more of a problem recently with HVCC on the one hand and lenders charging for failed loan locks. Both of these have bad effects which loan officers have no choice but to pass on to consumers in one way or another. I would like to go back to locking every single loan and guaranteeing total cost and rate as soon as I have an application, but doing so would inevitably mean that all of my clients would pay higher costs for the same rates in the end. Despite Washington's high minded words of the last few months, the changes in the loan industry have universally hurt both the consumer and the ethical loan officer, while helping lenders and to a lesser extent, unnecessary bureaucracies like Appraisal Management Companies. Nor will the new rules for the HUD-1 and Good Faith Estimate make any difference except around the edges when they take effect. They do a few things very right, but loan providers can still lie with malice aforethought to get you to sign up with them, and as long as they give you the notice of what they're really going to deliver seven days before the end of a thirty day (or more) process, they are still golden. If rates have gone up in the meantime, it's quite likely that the rational thing to do is stay with the liars, even though they can change their minds again as long as it's another 7 days to closing. If you think this is a recipe for jerking consumers around, you're right. Loan officers can tell you they've got 5%, then 5.125, then 5 again, then 5.375, all before finally delivering the 5.75% they intended to deliver all along, and similar games with cost apply. Remember, it's always a tradeoff between rate and cost. What is an informed consumer to do? Well, if you're an adult about costs, you can ask loan providers to guarantee their total compensation at loan sign up - the Upfront Mortgage Broker Guarantee. I would still prefer to do loan quote guarantees because they put the risk for misquoting squarely on the loan officer. However much I'd like to do them, though, the costs to me and all of my future customers of failing to deliver on Mortgage Loan Rate Locks is just too high for me to lock the loan before I have a reasonable assurance of the loan actually closing. In some cases this means once I have a full loan package, in others it means I need to wait until I have a loan commitment from the underwriter. Until then, in order to protect my ability to actually deliver low cost loans, I've got to let the rate and cost float. That's what is real, and it's easy for liars to say a loan is locked when it isn't. Loan quote guarantees would take all the uncertainty out of it for the consumer, but I can't do them at sign up any more except in a very few cases. The "We'll do the loan for $X total compensation" removes a lot of the incentive for loan officers to actually find the best rates as opposed to the loan quote guarantee, which quotes an aggregate figure for costs and rates that includes everything, including what the loan officer makes. It focuses upon the mouse of loan officer compensation, not the elephant of what the loan is actually going to cost you, but it's better than nothing. This is an intentional choice of words - think of the standard cartoon "elephant scared of mouse" schtick and you've captured the ridiculous nature completely. You really should focus on the total bottom line to you, but since we can't lock the loan under current market conditions until we are pretty certain the loan will close, we can't guarantee those terms at sign up, no matter how much we want to. One hopes if you're looking for a mortgage loan you're enough of an adult to realize nobody does loans for free. Nor are loans what most people think of as "cheap". It can be hidden in many ways (yield spread must be disclosed, but SRP and secondary market premium do not), but nobody really does loans for free. No matter which way they hide it or don't, you're still paying for it. Ask your loan officer the hard questions. Every single one of them. Nail them down as to exactly what they are offering, when they can lock it, what the closing costs will be, and how long it should take. The total closing costs shouldn't change even if the loan is allowed to float rather than locking. If you discover they have lied, well the best thing to do for the long term health of the loan market is to walk away, but most people won't do that. Things have gotten a lot more difficult for loan consumers wanting to actually get the best possible deal, rather than merely signing up with the loan officer who talks the best game. I would really like to go back to the way I used to be able to do things - Quote a loan I know I can deliver, lock it immediately, get the application done and work it so as to fund within the lock period. Unfortunately, if I tried it my future clients would all be paying higher costs when my closing ratio dipped lower than the lenders require it to be, and therefore they started charging me higher costs for the same rate, costs that my future customers would end up paying because there is no other way any more than there is for any other business. That's a good way to not only hose my future clients, but be forced out of business completely. One more koan to the loan shopping experience - this one from the loan officer side. Caveat Emptor ]]> http://www.searchlightcrusade.net/2009/07/the_loan_shopping_koan.html http://www.searchlightcrusade.net/2009/07/the_loan_shopping_koan.html Mortgages competition lender games loans low-balling practices prevention rate locks rate/cost Tue, 07 Jul 2009 07:00:00 -0800 How To Keep Listing Agents From Filtering Out Offers any offer, but it has come back in recent months. At least two properties my buyer clients have made offers on in the last few months have sold for substantially less than my clients offered and were both willing and able to pay for the property. I can tell you this because I have copies of the offer paperwork and have since obtained the final sales price from public records. This happens for two reasons: The listing agent wants both halves of the commission, and control issues having to do with kickbacks of one sort or another from other sources. The first is by far the worse. Even if the property sells for ten percent off the price it could have gotten (which may be most or all of your possible equity), your listing agent gets paid eighty percent more than if the property sold for the highest possible price to an offer represented by someone else. There are many agencies and brokerages out there that do one thing very well: Getting signatures on listing agreements. Everything else, not so much, but they really are great at getting access to property owners. No matter what city you live in, you've seen the advertising of this type of brokerage. They claim they're great so you should do business with them. However, anyone can claim they are great, especially in non-specific ways. The goal of all of this is to get you to take the easy way and come to them first, because if they're that successful to afford all that advertising they must be doing a pretty good job for their clients, right? As a result, they can get listing agreements out of property owners who don't understand what's really going on. I hope regular readers know better, because I've gone over why you don't want a top producer listing your property before. However, because that signature on the listing agreement gives them control over the property, control over access to the owner of the property, control over what information the owners have access to, and control over who can so much as see the property, there isn't much anyone except the owner can do about it. Indeed, once they sign the listing agreement, there's not much even the owner can do about it. There are also control issues with kickbacks. Illegal though it may be, many brokerages mandate that all of their transactions go to a certain title company, a certain escrow provider, etcetera, because they somehow make more money (either through kickbacks, common ownership, special services, or reciprocal referrals). However, if the listing agent controls both sides of the transaction, who's going to tell the principals involved that the agent is breaking the law? Quite often, they even restrict showings of other people's clients, because one of their agenda items is using the property to get buyer clients. Rather than actually working to sell that property (which is what they are obligated to do), they dangle it out there as bait so they can make contact with the foolish sort of buyer who calls the listing agent to see the property and force them into a buyer's agency contract. I was out of town for the Friday and Saturday of Memorial Day Weekend, and one set of my clients called a listing agent about seeing a property. First, the listing agent told them that "Sure, no problem to see it today!" even though the MLS listing which all other agents see said "48 hour advance notice - by appointment only" There might have been a special circumstance of which the listing agent was aware, but I kind of doubt it because they also wanted my clients to sign an Exclusive Buyer's Agency Agreement in order to see that property. Since I make it a point to educate my clients on this point, they knew to refuse. Here's the real sticking point: When that agent signed the listing agreement, they accepted a fiduciary responsibility to that seller. It is their responsibility to get it sold for the highest possible price in the quickest time with the fewest problems. It is a violation of that fiduciary duty to their listing client to act as that agent did towards my clients. Their duty is to get that house sold. If someone doesn't see it, they're certainly not going to make a good purchase offer. Anything unnecessary that causes or might cause a buyer to balk about making an offer on that property is a violation of their contractual and legal fiduciary duties. By conditioning prospective buyers seeing the property upon anything other than being there at the first mutually reasonable time, they are in violation of that fiduciary duty to their listing client. However, I must once again ask: If they control all access to that owner, who's going to point this out to the owner? Here's one person who definitely can't: Any prospective buyer's agent. Both agency law and MLS rules everywhere that I am aware of make it an punishable offense for buyer's agents to contact that owner directly. A buyer's agent could lose their license, MLS access, or both for doing so. It doesn't matter if I "only" lose one - I can't stay in business without both. In other words, the one group of people who have the professional knowledge and interest to possibly inform that property owner that they are being hosed is legally and professionally constrained from doing so. Yes, Virginia, real estate law is structured to protect the major chains and brokerages that advertise constantly (and control the National Association of Realtors and state associations, so they control the vast majority of real estate lobbying). Nonetheless, if you want to sell your property quickly for the best possible price and without it coming back to bite you, you really do want an agent. The pitfalls and ways that the real estate sharks trap you into their own private feeding frenzy really are enough to make you want an agent even if you couldn't do anything to protect yourself from the bad ones. So what is a self-interested consumer to do to protect themselves? Two things: Eliminate the motivation to do this, and eliminate their control over access to you, the property owner. Both are easy if you know how before you sign the listing contract. Afterwards, they are considerably more difficult if not impossible. Since most consumers don't know enough or don't care enough to do the research beforehand, this is why the vast majority of people who want to sell their property aren't protected. Some listing agents do a very creditable job even though you're not legally protected, but many others don't. Nor is there any real way of gauging their personality for certain ahead of time. It's easy to say the right things before that listing agreement is signed, then go off and do something completely different. Do you want to bet the return on a half million dollar investment on how they will really handle it? The easy one first: eliminating control of listing agents. There is one exception to the rule about other agents having no permission to contact you: If they are instructed to. Most of the time, you don't want to talk to other agents. But there are two exceptions: If they're having difficulty seeing the property, and if they're making an actual offer. If the listing contract is silent about these two issues, then the listing agent controls these absolutely. Actually, it's their broker, which amounts to the same thing at best, and could be much worse. So if you don't negotiate this in advance, know that you're committing complete control over these two issues to that agent or their brokerage, and there literally is no way for you to find out about any difficulties they don't want you to know about. What you, as a consumer want, is to get at least duplicates of any offers sent to you directly, and you want to be the one people come to with access issues. You want there to be explicit instructions in MLS to call you directly with any access issues, and to send at least copies of all offers to some facsimile number or email address that you control - not the agent. Put this right into the listing contract. You are entitled to check this on the listing at any time, and you should wander into your listing office at least once during the first week the property is on the market (without telling them you're coming) and demand a copy of your property's full MLS printout - the one that other agents see. You are permitted this on your property and your property only, so be prepared to prove you are who you say you are (Photo ID and copy of listing contract). You should also do this every couple of weeks the property is on the market. Check that the instructions stay what you want them to say in this regard. Note that even if prospective buyers and their agents don't comply with this instruction, the listing agent has no real way of knowing they didn't. Especially if you wait for that agent to contact you instead of calling them the second you get the fax or email. If they don't contact you within 24 hours, that's everything you need to know about that agent and brokerage. As a buyer's agent, I would be happy to send such duplicates - it means I have some real assurance my client's offer doesn't disappear into the trash can, as I'm pretty certain the ones at the start of the article did. As a listing agent, even if I'm working with the buyers to get me more information (like whether they are qualified) before presenting the offer, I'm going to make sure my seller client knows we've got an offer right away. For me, this happens whether there are instructions to send offer duplicates directly to you or not, but if it didn't, how would you know? I won't get offended by such requests. No good agent who will work for their clients best interests should get offended. It's a legitimate control you are exercising upon the situation, just like any other contractor-contractee relationship. The old maxim about "trust but verify" applies. The agents who get offended or don't want to do this are the ones you should avoid at all costs. Eliminating the monetary motivation for agents to filter out offers submitted by other agents is harder, but even more important. You as the seller do not want your agent also representing the buyer. Whose side would they really be on? In most cases, all but the worst crooks will be on the side of the seller, but there isn't any way to be certain you aren't one of the exceptions. There are tricks and things that one agent can do that you really can't guard against in general, but it is much less likely that two agents each representing different parties will collude upon. Anything shady, no matter what that might be, and at least one of them can be held legally responsible in a court of law! Nobody wants to be representing the mark in a con when the mark can come after them with an attack lawyer and expect to win a major damage award plus court costs and in many cases jail time. The way to do this is actually pretty simple: Write it into the listing contract that you will not accept Dual Agency. Period. You don't really care if the buyer is represented or not - if they choose not to be, that's their problem - but you won't permit your agent to represent them. That agent needs to pick a side of the transaction - yours - and stay on it, or they're not getting the listing. If they show the property to some prospective buyer or some buyer wants them to submit an offer, there is a standard form - the Non-Agency Agreement, that explicitly states that both the buyer and that agent agree that there is no agency relationship being created, and the agent is doing whatever they are doing because their contractual relationship with you, the owner of the property, requires that they do it. Tell that agent you won't even consider offers made without another agent until they show you the Non-Agency Agreement. If they can't give you their absolute and sole loyalty for the sale, do you really want them to have the listing? Furthermore, write it into the listing agreement that if there isn't another agent involved, your agent won't get to keep the buyer's agency share of the commission. A small amount of additional compensation is in order - there really is extra work and extra costs involved, so I ask for an extra half a percent if the buyer is unrepresented, which might just about pay for the extra my transaction coordinator charges plus the gas for meeting the appraiser, inspector, etcetera. You don't want your agent shooing away unrepresented fools offers, either, as they might do if they had to do extra work for no extra pay. You want to put the listing agent's financial motivation squarely where it belongs - they get paid the most money by getting you the highest price on the quickest sale with the fewest problems, not by getting both halves of the commission and the maximum in referral kickbacks. I'm not real hot on Designated Agency, either, where two different agents working for the same brokerage are buyers and seller's agent. It can work, but the controls necessary to safeguard consumers on both sides are both complex and opaque to that consumer - not to mention that most brokerages don't have them. As a rule of thumb for buyers, if you're working with a good buyer's agent, had been for a while, and it just happens you like a property one of the other agents that works with them is listing, chances are decent that might be okay (about 8 in 10). If you contact the brokerage because they're the ones listing the property, and they refer you to their in-house buyer's agent, chances are 999 out of 1000 that you should run, not walk, in the other direction. For sellers, it's worse. Unless your listing agent is unavailable for some reason, or that other agent from the brokerage can show a pre-existing buyer's representation agreement, I wouldn't want that offer. There are too many games that can be played, and it makes collusion to someone's detriment much more likely, as these agents work together constantly and might well have the level of mutual trust and teamwork (and possibly direction from the broker) to make a scam work and get away with it. In the majority of cases, this collusion more likely favors the seller than the buyer, but there just isn't a good way for anyone to be certain. As always, if there's a game being played and you can't prove who the mark is, you should assume it's you. Real estate attracts a lot of sharks because of the potential for high profits, and even the cheapest properties have enough profit potential to attract those sharks and all of the con games they play. The difficult part about this is that the vast majority of agents, even those who aren't necessarily among the worst, will strenuously object to these provisions. Most agents really want to "double end" their deals - represent both the buyer and seller - simply because they do get paid more. Most have never taken the time to understand all of the ethical and legal issues with "double ending" a transaction. But these provisions against getting both halves of the commission really are necessary to remove the motivation that causes bad agents to throw up barriers to offers not represented by them. You don't want them to even be tempted to filter out offers, restrict or refuse showings, or require that prospective buyers do business with their business associates, all of which are bad for you, but result in that agent eventually receiving more money either directly or indirectly. One more thing is beneficial: Require a notation in MLS that says you welcome buyer's agents presenting offers in person. Your agent should also want to present counter-offers in person. This not only gives you another opportunity for outside contact uncontrolled by your listing agent, it humanizes that transaction. It turns a faceless fax machine spewing paper into real live human beings. You'd be amazed how much it helps the probability of the transaction actually closing. The issue of listing agents acting for their own benefit to the detriment of the clients is real, is common, and is once more increasing in magnitude. If you're a property owner who wants to sell on the best terms possible, you need to protect yourself from the problem before you sign that listing contract. Caveat Emptor ]]> http://www.searchlightcrusade.net/2009/07/how_to_keep_listing_agents_fro.html http://www.searchlightcrusade.net/2009/07/how_to_keep_listing_agents_fro.html Buying and Selling law listing agent negotiation practices prevention sellers strategy Mon, 06 Jul 2009 07:00:00 -0800 Can You Cancel After You Sign Mortgage Loan or Purchase Documents? what if i sign all the paper work for a house at a title agency, can i back off the house? Depends upon the laws in your state. The Federal three day right of rescission only applies to refinancing your primary residence. (here's an article about that in case this is a refinance, because refinancing your primary residence has a mandatory three day right of rescission.) In most states, for purchases and purchase money loans, there is no right of rescission whatsoever - you have to go through the courts, and prove something actionable, to get out of the purchase. The person handling escrow could theoretically fund and record a purchase immediately upon signing, although in practice you can figure it happening next day, providing everything really is ready to go. If the escrow officer has not yet funded and recorded, then by amending those escrow instructions, giving the escrow handler new instructions not to continue with the transaction, and making them aware of amending instructions, you can almost certainly get them to stop if they're not yet finished. However, there are likely to be legal consequences and cancellation fees and all of that stuff. Talk to a lawyer in your state if you want to know all about this dismal subject. But once you sign the basic documents, there is no legal impediment to finishing a purchase transaction. So you want to be darned certain before you sign that all is as it should be. TAKE YOUR TIME. If the signing agent is in a hurry, that's their problem. Concentrate on three items for the loan: The Note, the Trust Deed, and the HUD-1. Any funny business with the loan has to show up on at least one of those, and usually two. For the property, make certain they're not trying to slide any last minute disclosures that you weren't aware of ("You didn't know that they're building a chemical factory on one side and a stockyard on the other?" "You didn't know that the foundation is cracked and the roof leaks?"). It's disgusting how often I hear about things buyers should have known before they made an offer being presented to them at the final signing. That's not an agent who was looking out for your best interests - that was an agent who hosed you engaging in legal manouevers to cover their backside after the fact. An uncommonly large proportion of the ones I find out about are in Dual Agency situations, where the agent is pretending they can serve two diametrically opposed interests at the same time. There's a blortload of paperwork at signing for a loan, just by itself, and adding a purchase at the same time doesn't exactly cut it down. Quite often, the less scrupulous will use that, trying to hide something that should kill the deal (at least as written) in amongst the blizzard of paperwork you're asked to sign. You need to understand everything you sign. If they tell you a given form doesn't apply to you, there is no reason why you should have to sign it. Set it aside in a separate stack under your control, so they can't ask again. If you don't understand it, read it until you do. Ask questions. If there's a problem, get it dealt with before you sign. Do not accept, "Just sign now, and we'll deal with it later." Once you have signed, you are stuck. I always call the signing "The Moment of Truth," because if there's an issue you should be concerned about, whether it be property or loan based, it can be hidden until then, and often is, because at the signing your average person has their eyes on the prize, and they're thinking "all I have to do is sign all of this and we're done!" So many unscrupulous sellers and loan officers will hide things until then, knowing that industry statistics say something like half of all the people won't even notice changes at signing, and of the ones that do, eighty to ninety percent will sign anyway, not knowing enough to realize they shouldn't. You shouldn't be discovering anything for the first time at signing. If you are, it's a sure sign that someone didn't do their job, and quite often, indicative that they actively hid things from you. I cannot tell you absolutely that you should cancel the entire transaction if you discover something you didn't know at signing, but you should always go to signing mentally prepared to cancel. You always need to keep a sense of perspective in real estate, but if you discover something you didn't know at signing, especially if you don't immediately understand all the consequences, chances are good that you should cancel. A good agent or loan officer has absolutely nothing to fear from someone going into signing ready to cancel if something is not as they were led to expect. Oh, occasionally a loan officer you've never worked with before will bite a good agent, and vice versa. This is one reason I try very hard to get my buyer clients to at least apply for a back up loan with me, and why I really want my purchase money loan clients to work with me as a buyer's agent (While carefully emphasizing that it is their choice as under RESPA it's a serious offense to try and force people to do this). That way, whatever happens is all my fault and I have nobody else to blame - but also I can make sure nothing goes wrong with either side by making sure my client knows everything well in advance. Nothing that my clients see at final signing should be a surprise. Ever. Caveat Emptor Original article here]]> http://www.searchlightcrusade.net/2009/07/can_you_cancel_after_you_sign.html http://www.searchlightcrusade.net/2009/07/can_you_cancel_after_you_sign.html Real Estate buyers disclosure law lender games loans Sun, 05 Jul 2009 08:00:00 -0800 When Selling, You Need To Understand Your Target Market Debt to Income Ratio for an 80 to 100 percent Loan to Value Ratio loan, than you will targeting the fry cook who's saved and invested for twenty years and is all of a sudden ready to buy the property, now that he has a 70 percent down payment. That fry cook may show up on their own anyway, but how many people do you know who save that much over that long a period and then want to spend it all on real estate? As opposed to the newly married professional couple who've been in their careers a couple years each, have a little bit of money saved, and now they want to stretch their budget as far as they can? Most people take precisely this latter path, and that is why you should concentrate your efforts to sell to those people most likely to buy your property. At this update, I can do a thirty year fixed rate loan at 5.375% with no points at all, or 5.00% for a total of one point. Even though the equivalent rate for a 5/1 hybrid ARM is 4.125%, I'm thinking most folks are going to want that thirty year fixed when I offer them the option. This is going to change a little bit every day, but in most cases, it's not going to be significant change. Things like interest only loans will stretch their qualification a little bit, but those are best approached with a trembling hand for purchases, and you're better off planning for the buyer being advised that the property may be too expensive for them in such an instance, and having a plan in place, than you are hoping that everything goes perfectly for you to sell to an unsuspecting buyer. Yes, you're selling and once you get your money, you really don't care what happens. But these days, a lot of agents and loan officers are suddenly discovering the advantages of really looking out for their client's best interest, and you don't want to assume that your prospective buyer's agent will not be one of them. Remember, you're trying to look ahead and get a consummated transaction for the best practical price - and a buyer with a loan that does not fund is not the one you want, no matter how good the initial offer. Not all loan amounts are the same. When I first wrote this, once the loan amount goes over $417,000, the conforming loan limit in effect then, the current loan environment is that 100% financing goes away for A paper borrowers. They might then have been able to get 100% financing on a sub prime loan, but the rate/cost tradeoff goes up no matter when and no matter where they want to buy. Subprime was kind of in Never Never Land back then (now it's mostly dead). If you read between the lines of what their reps are saying before the industry imploded completely, they wanted A paper borrowers who didn't know they could get an A paper loan. And nobody wants to touch stated income loans right now, no matter how good the credit score or down payment. Fact. Whether you're a seller or a buyer, you can live with it and plan for it, or you can fight it and still lose. So what I'm going to do is compute the monthly cost of housing on purchases of a given size, together with the income to qualify. I'm going to assume this is California, with California property tax rates. Furthermore, I'm just going to make a flat allowance for Homeowner's Insurance plus Association dues of $250 per month. It's not exact, but it'll put you in the right ballpark. With a specific property, you can get closer, or course. Let's start with 90% financing, a 90% loan with PMI, because that's the only way to do it right now. This obviously requires the buyer having a 10% down payment plus a bit, and limits us to conforming (and now temporarily, jumbo conforming) loan amounts. I'm also going to do the numbers at an assumed 6% loan rate, because that is a better long term rule of thumb. Here's what it takes:
purch price $200,000.00 $220,000.00 $240,000.00 $260,000.00 $280,000.00 $300,000.00 $320,000.00 $340,000.00 $360,000.00 $380,000.00 $400,000.00 Monthly COH $1,657.52 $1,798.28 $1,939.03 $2,079.78 $2,220.53 $2,361.29 $2,502.04 $2,642.79 $2,783.54 $2,924.30 $3,065.05 mo income $3,683.39 $3,996.17 $4,308.95 $4,621.74 $4,934.52 $5,247.30 $5,560.09 $5,872.87 $6,185.65 $6,498.44 $6,811.22 annual inc $44,200.65 $47,954.05 $51,707.44 $55,460.84 $59,214.24 $62,967.64 $66,721.04 $70,474.43 $74,227.83 $77,981.23 $81,734.63
In other words, a family who wants to buy a $400,000 property without a down payment needs to be making almost $82,000 per year. Them's the facts, and that's not including any existing debt service they may have. Credit cards, car payments, student loans, etcetera. If other debt service is $500 per month, you raise the income to qualify by over $1100, and the yearly income by $13,000 plus change. San Diego's Area Median Income is a little over $66,000, and a family making that much money can afford a loan of about $320,000 currently - if they don't have any other debt. If they have a huge down payment, of course, it's easier, but how many people have you encountered recently with huge down payments? Now, let's consider people who actually have a 20% down payment. Most likely, they bought a condo a few years ago and now they've sold it, but they had enough equity in the condo to account for that 20% down on the more expensive property. Or they sold the condo and bought a starter home, and now they've sold that and are looking to move up again. This is without PMI, and having some equity means that not only are the terms of the loan more favorable, but you don't have to borrow as much to buy a property that costs the same, and so a property of the same value is much more easily affordable.
purch price $200,000.00 $220,000.00 $240,000.00 $260,000.00 $280,000.00 $300,000.00 $320,000.00 $340,000.00 $360,000.00 $380,000.00 $400,000.00 $420,000.00 $440,000.00 $460,000.00 $480,000.00 $500,000.00 $550,000.00 $600,000.00 $650,000.00 $700,000.00 $750,000.00 $800,000.00 $850,000.00 $900,000.00 $950,000.00 $1,000,000.00 MonthlyCOH $1,417.61 $1,534.38 $1,651.14 $1,767.90 $1,884.66 $2,001.42 $2,118.18 $2,234.94 $2,351.71 $2,468.47 $2,585.23 $2,701.99 $2,818.75 $2,935.51 $3,052.27 $3,169.04 $3,460.94 $3,752.84 $4,044.75 $4,336.65 $4,628.55 $4,920.46 $5,212.36 $5,504.26 $5,796.17 $6,088.07 mo income $3,150.25 $3,409.72 $3,669.19 $3,928.66 $4,188.13 $4,447.60 $4,707.07 $4,966.54 $5,226.01 $5,485.48 $5,744.95 $6,004.42 $6,263.89 $6,523.36 $6,782.83 $7,042.30 $7,690.98 $8,339.65 $8,988.32 $9,637.00 $10,285.67 $10,934.35 $11,583.02 $12,231.70 $12,880.37 $13,529.05 annual inc $37,803.04 $40,916.68 $44,030.32 $47,143.96 $50,257.60 $53,371.23 $56,484.87 $59,598.51 $62,712.15 $65,825.78 $68,939.42 $72,053.06 $75,166.70 $78,280.34 $81,393.97 $84,507.61 $92,291.71 $100,075.80 $107,859.90 $115,643.99 $123,428.08 $131,212.18 $138,996.27 $146,780.37 $154,564.46 $162,348.56
Once again, this assumes there's no other debt service involved. But if you've got a home with a $700,000 price tag, you're still looking at trying to lure in a buyer family that makes a minimum of at least $10,000 per month. These kinds of buyers are not going to go for old carpet and a carpet allowance. They want your seller to have already dealt with it. Even if it's the cheapest, most beat up property in Rancho Santa Fe, on the smallest lot, the sellers are still going to take a hit on the price that's a lot bigger than the actual cost of such things for not dealing with it themselves. For a successful listing, you need to know your target market - know who you are trying to sell to. It's a hard lesson to get across, but it really is necessary to pick your targets in order to hit them. Some people do buy properties that are apparent mismatches between their lifestyle and the property, but not many. As listing agents, we not only need to understand what is and is not a match before setting off to attract a buyer, and recommending appropriate measures to the owner before it goes on the market, and not only we but our clients as well are much better off by concentrating our marketing efforts where they are most likely to succeed. Caveat Emptor Original article here ]]> http://www.searchlightcrusade.net/2009/07/when_selling_you_need_to_under.html http://www.searchlightcrusade.net/2009/07/when_selling_you_need_to_under.html Buying and Selling listing agent markets sellers strategy Sat, 04 Jul 2009 09:00:00 -0800 Where Would I Invest A Million Dollars? now. invest those funds in a diversified mutual fund and money market portfolio. Once that's done, I'd buy some rental properties, because within two years anything I buy now is going to be a lot more valuable. Leverage my money right, and we're talking at least two million, probably more. Specifically, Condominiums, and Townhomes. High density housing. Why? Well for an illustration as to the first part of that reason, look at my article Economics of Home Ownership in High Density Areas. We're in a phase here in southern California where we're getting ready to switch, by economic necessity, away from the single family detached property on its own lot and towards the community interest lot. Land is just too expensive. The average person or family, making an average paycheck, can no longer afford single family detached housing within commuting distance of work unless they've got one heck of a down payment. The demand is too high, and the supply too limited, for everyone who wants one to have one. When that sort of situation happens, price goes up until enough people get priced out. Here's the trip: When you're talking rent, half million dollar single family detached housing rents for maybe $1800 per month. But if you buy a $200,000 condo, it rents for $1000 to $1200. Put 20% down, and it's very possible to have a positive cash flow on such a unit - something it's not currently possible to have with the detached house. The fact that the spread is so small is temporary, of course, but in the meantime it's an opportunity for a sort of arbitrage. Furthermore, the average family can afford a fairly nice condominium or townhome. It's just that during the Era of Make Believe Loans, people were told they didn't have to "settle." So they purchased properties far beyond their real means, because they were being told they could qualify for those ridiculously high dollar value loans. (I call it the Era of Make Believe Loans because the agent made believe people could afford more expensive properties, the lender made believe that people could qualify, and the consumers made believe that there weren't deadly traps they were falling into on every single one of them. It was seductively easy for everyone. The agent didn't have to sell only the property the client could afford, or "settle" for the smaller commission. The lender and loan originators could make money hand over fist on paper. The consumers could pretend they could afford a property far beyond their means, and didn't have to "settle" for what they could really afford. And people are still making believe that the Era of Make Believe Loans is going to come back.) But denial has a definite half life when it encounters pervasive economic reality. Once it's become accepted that the housing market has stabilized from its free fall, people will be forced to look reality straight in the eye. We had the bubble, we had the pop, and now it's time to start going up again. Once it starts happening, families will be forced to confront the fact that they can't get the American Dream all in one easy step by essentially clicking their heels together and declaiming, "There's no place like Oz!" They will have three options: Stay a renter forever, move away to somewhere there is less demand or more supply, or settle for what they can afford, leveraging it to something better. When larger number of people realize that those are their choices, the demand for and price of condominiums is going to shoot up. So, put $40,000 or $50,000 into a $200,000 condo, rent it for $1200 per month, and your cash flow is just about even. That's the second half; the situation right now, as it exists. I've predicted rents are heading up in the near future several times. Rent goes up, I'm making a couple hundred dollars per month while values are climbing. In a few years, I've a property that has doubled in value while making me some small cash in the meantime. Multiply this by a dozen, and I've got two to three million dollars from an investment of six hundred thousand or so. Plus, of course, I'm going to pull all the old flipper's tricks just before I sell them. Yes, there's risk - risk that can be minimized and dealt with. That's why I wouldn't be sinking every last penny I had into it, a mistake way too many people have made in the last few years. Right now, the market in Southern California is very highly segmented, meaning that prices and demand for some things (Single family residences in desirable parts of town) is through the roof while there's a glut of other things (condos). Condos are, for most people, what my econ professors used to call substitute goods for single family detached housing. But when people figure out that it's condos or rent or leave the place they really want to live, they'll start going for the condos. The hassle of HOAs is nothing near as bad as having a landlord. Of course, nobody's giving me a million dollars. But if you have $50,000 sitting around, you can make about 10% per year in the stock market with a reasonable amount of risk, Over ten years, that's turning your money into about $138,000. Or, if California real estate increases at an average rate of 5% per year for the next ten years (our forty year average is about 7%), that $200,000 condo turns into a $325,000 condo, while your loan has been paid down to $125,000 and you walk away with $200,000, not counting the cash in your pocket between now and then. If we should actually tie our long term average of 7% annualized increases, that's a $390,000 condo and you walk away with $265,000. Meanwhile, the cash flow picture gets better every year as rents increase. Your choice, of course, but I'm not the only one who sees an opportunity here. Caveat Emptor Original article here]]> http://www.searchlightcrusade.net/2009/07/where_would_i_invest_a_million.html http://www.searchlightcrusade.net/2009/07/where_would_i_invest_a_million.html Buying and Selling markets planning strategy Fri, 03 Jul 2009 07:00:00 -0800 Do Furnishings Convey With The Property? If a home for sale has a refrigerator included on the listing report, and the buyer's agent does not write that it goes to the seller in a contract, is the buyer actually entitled to the refrigerator. I am actually going through this right now. The listing does not matter. What does the purchase contract say? That is the complete controlling fact of the whole entire transaction. If the contract is silent, what matters most is whether the refrigerator in question is appurtenant to the land or not. Appurtenances are things which are physically and structurally attached to the land which is always the primary thing being sold in a real estate transaction. For a standard house, nobody would seriously argue that they have the right to remove it, because it is attached securely to the property. There are service pipes coming out of the ground attached to the ground and a foundation it is attached to. There are electrical service wires, telephone wires, and cable TV wires. All of which would come up if you pulled the house away. So the house is appurtenant to the land. This is how all real estate transactions are really structured, by the way. You are buying the land, and the house, if there is one, comes along because it's attached to that land. So if the refrigerator is somehow built in, such that removal would be a nontrivial project, then it's appurtenant to the land. If all you have to do us unplug it and push it away on a dolly, that's not appurtenant, and there is no more reason why they should have to leave that than why they should have to leave their dog, cat, or child. Now this is not to say that you can't build an excellent court case based upon the fact that there was an implicit promise made in the listing, and everything else in the contract was built off of what that listing said. Talk to an attorney for more information than I can ever give you on that score. Even if they're not obligated, the seller might leave the refrigerator anyway. Maybe they've got another, maybe they are just living up to what they promised even though they might not be legally required to do so. It's not like most people go around looking for ways to be evil. I've never met anyone who acted like a Disney villain. I have met some pretty shady characters, but mostly they're more sophisticated about it. The thing to do, if you're concerned about the refrigerator or anything else where you want it to stay, is to put it in the purchase contract. If the listing says these appliances stay, putting it into the purchase contract won't offend the owner - it should be something they expect. In any of these cases, the seller can force you to go to court by being an obstinate donkey, even when they haven't got a leg to stand on, legally speaking. It's not like you have the magic power of enforcing agreements. That power belongs solely to the executive branch of government, which will take no action in cases like this without a court order. Whatever the court says is final. Unless it's some $25,000 wonder fridge, however, it is not likely to be worth going to court over. Much cheaper to buy a new refrigerator, and your expected return on investment is much higher. Caveat Emptor Original here]]> http://www.searchlightcrusade.net/2009/07/do_furnishings_convey_with_the_1.html http://www.searchlightcrusade.net/2009/07/do_furnishings_convey_with_the_1.html Buying and Selling buyers law sellers Thu, 02 Jul 2009 07:00:00 -0800 Links and Minifeatures Carnivals Only Carnival of Real Estate Carnival of Personal Finance ]]> http://www.searchlightcrusade.net/2009/07/links_and_minifeatures_2009_06_4.html http://www.searchlightcrusade.net/2009/07/links_and_minifeatures_2009_06_4.html Zee Links and Minifeatures Wed, 01 Jul 2009 12:30:00 -0800 Short Sale Negotiators and the Interests of Potential Buyers short sale process as a kind of "Black Box", delegating the negotiations with the lender to a negotiations firm, treating the negotiation firm's advice as if it were handed down from on high, and expecting buyers (and their agents) to blindly follow along in profound indifference to the buyer's interest. Sadly, they're getting a lot of cooperation from buyer's agents who should know better but are acting more like sperm donor agents than real agents. I have seen the following demands from these knuckleheads in the past couple of months:
  • trying to require buyers to pay repairs, termite etc before they own a property, when in fact the transaction may never come off
  • requiring buyers to pay the negotiation firms that they had no role in hiring, because the lenders allegedly won't allow it to come out of sale proceeds. Maybe you should take the hint the lenders are giving you - these negotiators and their recommendations do not serve the interests of any of the three principals to a short sale transaction. The interests they serve are those of a lazy (and horrible) listing agent
  • Agreeing to keep the offer open at least sixty days without an accepted purchase contract
The answer to any of these demands is short, simple, and to the point: No. You want my client to pay for repairs to a property they don't own (and most often the sellers don't want to take it off the market)? How can agreeing to this not be a violation of buyer fiduciary interest? You want my buyer to give keep an offer open two months without a valid purchase contract? You want my buyer to pay a firm that they have no role in hiring and does nothing to represent their best interests? First off, ladies and gentlemen, if you don't have a valid purchase contract, the thing to do is walk away. There is a world of difference between "offer accepted pending lender approval of short sale" and "we have submitted your offer to the lender" In the first case, you have a contract with one contingency - kind of like a loan or inspection contingency on the buyer's side, only from the seller's side instead. Nothing wrong with that. Transactions with seller contingencies happen every day. But it also means you have an accepted offer. There can be only one accepted offer, and once there is an accepted offer, the property needs to be removed from the market and no other offers may be considered until this one falls apart. In other words, the seller is stuck with the buyer every bit as much as the buyer is stuck with the seller. But if you don't have an accepted offer, what you have is "Hope I get it". Kind of like the Little Engine That Could, except there is no defined end to the process and it's not under your control. It's just repeat the mantra of "Hope I get it' until you get told that you didn't. That choice of phrasing was very considered, by the way. Under this scenario, listing agents submit multiple offers to the bank - a recipe for disaster if ever there was one from both the perspective of the buyer and the seller. If the bank keeps getting offers, what are they going to do? That's right, keep the property on the market hoping for a better offer. Whereas if you show them some hard back and forth negotiation and one or more prospective buyers dropping out of the process until only one is left, that's good evidence that that is all the property is worth. Understand this in your bones: That short sale lender wants one thing above all else: Their money. As much of their money as they can possibly arrange to get back. The owner's job transfer, illness, etcetera, are not their problem. That lender needs to see conclusive evidence that there is no way they are getting any more money out of this property and this owner before they will approve the short sale. They need to understand that this is all the market will support, and that the current owner cannot pay them any additional money, and that if they don't get off their fat backsides and approve this pronto, not only are they going to end up with less money when this buyer walks, but they're going to have to pay the expenses of getting it sold as well as the penalties for having a nonperforming asset on their books. The way to approach that is to negotiate hard with prospective buyers, as if the lender weren't part of the picture. The best evidence that this is what the property is worth is that you tried to convince multiple people to offer more, and this one you picked is the one that's the best for the lender. Submitting more than one offer to the lender is a recipe for Delay and two different forms of Denial from that lender. They are going to want to wait until they get still more offers. The lenders do have a secondary concern to getting their money, and that is time. It may be difficult to believe for agents and buyers and sellers who wait three months waiting for the bank to make up their mind, but the bank really would rather move quickly. Time costs them more money. It's just that most listing agents do not and will not do the work of actually getting the offer approved by the short sale lender - which they accepted responsibility for when they took that listing. "Short sale specialist" means a lot more than hiring a negotiating firm! This nonsense about asking buyers to fork over cash for repairs before closing, asking them to keep offers open without an acceptance of that offer, and asking them to agree to pay the negotiating firm are all things that an appropriately represented buyer is going to ask for concessions for. Concessions on price, concessions on indemnification, concessions just for putting up with the ridiculous nonsense on stilts. This all translates to the buyers who are well-qualified and have plenty of resources walking away, while the ones who are marginal or even below qualification level are perfectly willing to hang around in the hope that a miracle will happen. What else this means is that the property sells for a lower price. But the Broker's Price Opinion has no way to reflect these unattractive things making the property worth less to the buyers. It is therefore going to come in higher than the sales price. So we have two additional ways that the transaction falls apart because the listing agent couldn't do the correct thing in the first place. With stuff like this happening, is it any mystery why four out of five short sales fail? Is it any wonder that the better buyer's agents advise their clients to avoid short sales? Short sales done correctly are really pretty much like regular sales, albeit with one long, difficult and thoroughly unpleasant step added. But what happens before that step shouldn't be any different for a short sale than any other property. Nor should what comes after be any different, except that the seller cannot get any cash out of the deal. The one extra step that is actually necessary does impact buyer desirability, but not nearly so much as all of the unnecessary nonsense (euphemism alert!) that some listing agents insist upon adding. All of this is, incidentally, one more piece of evidence that most major real estate brokerages are built around the seller and listing property for sale for minimum effort on their part, especially of any actual licensed agent involved. The buyer can go hang. In some cases, literally. No buyer's agent worth what comes out of the south side of a northbound cow is going to counsel their buyers to put up with this stuff, at least not without a lot of concessions including a major downwards adjustment on price (and as I covered above, the lenders will deny such sales when the broker's price opinion comes in too high). But people still keep calling listing agents about their property without having a buyer's agent to advise them. Given that, the agents think they'll find some clueless victim to sell it to. All too often, someone proves them right. In the meantime, like Tina Teaser, the worthless listing agent who is really impeding the sale of the property uses the listing to make contact with as many buyers as possible. Buyers can't force sellers to sell, much less to sell to them in particular. But sellers and listing agents shouldn't be blind to things that cause buyers to walk away or to be willing to pay less simply because the sellers are not getting cash out of the deal. Especially in a short sale situation. They may not get cash, but soon enough they will be back to getting 1099s for forgiveness of debt, a taxable event. Every dollar they can prevent the lender from losing is going to help them. The general statistic is that one short sale in five actually comes off. Given the nonsense listing agents expect buyers to put up with, it's no wonder that buyers getting disgusted and walking away is right at the top of the list of reasons for fall out. Sellers need that buyer - without a buyer, they don't have a sale, and nobody sells their property on a short sale without a need. Nor does this nonsense on stilts motivate the bank to get off their backside and approve the short sale. Quite the opposite, actually. Caveat Emptor (and Vendor)]]> http://www.searchlightcrusade.net/2009/07/short_sale_negotiators_and_the.html http://www.searchlightcrusade.net/2009/07/short_sale_negotiators_and_the.html Buying and Selling buyer's agent buyers lender requirements listing agent negotiation planning practices sellers taxes value Wed, 01 Jul 2009 07:00:00 -0800